Expat estate planning with foundations

Structure your estate planning like the truly wealthy

Richard Colburn

Originating in Roman times, foundations really can claim to be the original financial planning vehicle, predating trusts by around a thousand years. But if you thought that private foundations were the exclusive domain of people like Bill Gates, think again. Foundations are one of the most overlooked and yet most effective forms of asset protection and estate planning that expats can put in place which, like good investment vehicles, is designed to save expats money without costing you the earth.

Foundations and trusts

The estate planning concept of both foundations and trusts is quite simple. Assets such as real estate, shares, cash etc are transferred out of the estate of the legal owner, known as the Founder or Settlor. These assets are then managed by a person or persons selected by the Founder/Settlor for the benefit of the beneficiaries. A ‘letter of wishes’ confers both powers and restrictions on the ‘managers’ of the transferred assets and also identifies the ‘beneficiaries’.

Freedom of choice and freedom from tax

By transferring assets into a foundation or trust, the Founder/Settlor can avoid the forced Heirship laws of countries which permit a will to be challenged and overturned if it does not meet with minimum statutory legacy requirements. Leaving your estate in the form of a foundation or trust provides a very effective and protected, lasting legacy for expats. Such arrangements also avoid probate. Locating such estate planning vehicles offshore can also avoid future taxes that would have arisen both during the lifetime of expats as well as on their death. What they do not own cannot be taxed.

The fear factor

Foundations and trusts are structurally different. Technically a trust is just a legal action and so does not exist as a separate legal entity. A trust is a common law concept and whilst different countries have enacted laws governing the way in which trusts are managed, they are not distinct entities. For this reason, the ‘trust’ does not and cannot own the trust assets. Trust assets are legally owned by the Trustees (albeit for the benefit of the beneficiaries), which is not always a comfortable proposition for expats wanting to ensure asset protection.

The Foundation factor

Foundations are separate legal entities. This fundamental difference means that it is the foundation itself that owns the assets, not the trustees. Although structurally similar to a company, a foundation differs in that it has no issued shares or stock. This is important for those expats who are required by their home countries to report foreign controlled companies. In addition because foundations are based on civil law and not common law, they are much harder to challenge and overturn than trusts, an important feature in estate planning and wealth preservation for expats. Within a trust, only the beneficiaries can bring a legal action against the trustees, including for their removal. It is then necessary to legally transfer ownership of trust assets to the new trustees. This is both time consuming and expensive for expats. With a foundation, the Council members (trustees) can be removed by the Protector, who is usually the expat that provided the foundation assets, without reference to the beneficiaries and since the foundation owns the assets, there is no transfer of ownership formalities. Foundations also have the advantage of being able to exist in perpetuity, with no imposed time limit. Most trusts have maximum durations imposed on them.

Common questions about foundations

Can foundations be set up in every country?

To date only a small number of countries have enacted laws allowing for the establishment of foundations.

How well regulated are these countries?

Countries which permit the establishment of private foundations comply fully with international protocols regarding money laundering, drug trafficking and terrorism. But beyond these categories of criminal activity they maintain strict client confidentiality.

Will my money be safe in the country of establishment of the foundation?

These countries are politically stable and well established world recognised offshore financial centres. However as with offshore companies, foundation bank accounts and other foundation assets can be located anywhere in the world and for expats usually are.

What about tax?

The countries where the foundations are established do not tax foreign sourced income and even some locally sourced income, such as bank interest, is free of tax. Assets located outside of the establishing country will usually be located in another offshore and tax-free financial centre.

Can I still make use of other investment vehicles as an expat if I give my money to a foundation?

Investment vehicles can be used by many different classes of investor including individuals, companies, trusts and foundations. Foundations are particularly useful in multi generational tax planning for expats since they can be created to run in perpetuity. There are special types of investment vehicles that can be used to allow for continuity on the death of the expat Founder or Protector.

What about confidentiality?

As with individual expat investors, if you want to invest your foundation assets safely and securely, this is best done through an investment vehicle offered by a brand name financial institution located in an OECD group 1 country. These institutions require the same information regarding the source of wealth from foundations as they do for individuals. However, once invested, the foundation and the expat who sets it up enjoy the same high level of confidentiality as any other private investor. In addition, the establishing country of the foundation will have its own secrecy laws, thereby ensuring complete confidentiality and asset protection.

What does it all cost?

Some jurisdictions charge a large amount to set up and run on top of hefty legal fees, whilst others are much more affordable. It is possible to set up a foundation for around $1,000 with annual running costs of even less.

How rich do I need to be to set up a foundation?

This will depend on the establishing jurisdiction chosen. But the minimum estate necessary for setting up foundations is less than you might think.

Working with independent and professionally qualified financial advisers it is possible for expats to make use of foundation structuring with much smaller levels of investment than are necessary to become a ‘private banking client’.

Aren’t foundations supposed to be not-for-profit entities?

Foundations are not permitted to be used directly as a vehicle for commercial activity. But they can engage in banking activities which include, the holding of bank deposits, shares, bonds, mutual funds etc, provided that the purpose is for the benefit of beneficiaries, particularly expats.

What about protection against creditors?

Trust law doesn’t always afford protection against creditors, either for the Settlor or the beneficiaries. Foundations do provide protection for the Founder and beneficiaries. For this reason, they are a useful protection tool for the personal assets of those expats whose work is subject to penal litigation action and awards.

Can corporations make use of foundations?

Yes. The foundation cannot actively be engaged in commercial activity but, as part of your overall financial planning strategy, it can act as a holding entity, holding the shares/stock of a company or companies, which would usually be offshore.

Avoidance and evasion

It is the task of tax collecting authorities to extract all of the tax to which they are legally entitled. It is your right to part with no more money than you are legally obliged to pay, which for some expats is nothing.

Foundations can help expats to legitimately avoid significant amounts of tax and ensure that your worldly goods are distributed as you intend.

Helping an expat investor to financially restructure into an investment vehicle via a foundation requires careful planning. For expat investors, your choice of investment location, foundation country of establishment, intended use of foundation assets and the nationalities of the beneficiaries and Founder are all crucial and interlocking factors in the design of your solution. Professionally exam qualified financial advisers can help you to design a structure and financial plan that best meets these objectives.

It’s your money and your peace of mind.

Richard Colburn is a UK exam qualified financial adviser with Sterling Assets.

Questions to the author can be directed to 053 839 463 or email us


Published in: on June 27, 2006 at 7:24 am  Leave a Comment  

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